Mr. Jordan of the SNB has said that the CHF ceiling remains essential to safeguarding the economy. The ceiling is very credible.

The German SPD has called a meeting of 200 party members for 27 Sep to discuss a coalition with the CDU. Polls suggest that the public favours a grand coalition. Mr. Steinbruek has previously said that he would not serve in a coalition government, and the party membership is sceptical, but other SPD grandees will be tempted by ministerial appointments. The only other alternative for Mrs. Merkel is a coalition with the Greens (nobody will form a government with the Left Party). According to Quentin Peel, writing in the FT in 2012, the CDU and Greens have a long-standing mutual distrust, and their two attempted alliances in Hamburg and Saarland ended in collapse; but, on the other hand, they likely agree on the major issues of nuclear power, fiscal discipline and European integration and the Greens have recently elected a centrist co-leader.

Mr. Draghi said that the ECB was “ready to use any instrument, including another LTRO if needed, to maintain the short term money markets” at the desired rate. This is in response to the decline in excess liquidity in the financial system owing to the repayment of LTROs, and attendant fears of an increase in funding rates.

Messrs. Dudley, Fisher and Lockhart gave speeches. Dudley said that more evidence of a pick-up in the economy’s forward momentum would be required for him to support tapering. Fisher said that the Fed had harmed the credibility of its communications by deciding not to taper. Lockhart highlighted the negative implications of slowing payroll gains and falling labour-force participation. Dudley’s assessment that the economy is still weak and fiscal and monetary tightening offset improving economic fundamentals are in line with my own views. It would be consistent with these views to see the US equity market as being at too high a level.

Mr. Broadbent of the Bank of England said that forward guidance should be interpreted as a commitment to keep monetary policy loose as long as the economy required it — in other words, it should be seen as giving information about the BoE’s reaction function rather than as a commitment to keep rates low. It seems the BoE has failed to understand the lessons of the Fed’s forward guidance. Rates fell in the US after the forward guidance was issued because markets took it as a commitment. Further, the BoE was already seen by the markets as very doveish, so further information about its doveishness should not be expected to have an effect. With the short-term nominal rate effectively at its lower bound, central banks should be seeking to reduce real interest rates by flattening the nominal curve and raising inflation expectations. To do that, they should go as far as politically possible towards pre-committing to keep rates low.

Data:

HSBC China flash PMI: 51.2. A big jump!

Eurozone flash PMI 51.1 d.e. and fell, but still around the highest since mid-2011.

At Mr. Rajan’s first meeting, the RBI raised its repo rate 0.25% to 7.5%, in spite of the weakness of the economy, and dialled back its emergency measures to protect the currency, cutting the marginal standing facility by 0.75% to 9.5% and lowering cash reserve requirements. Mr. Rajan mentioned years of relatively high CPI inflation as a reason for increasing the repo rate. The net effect of these measures may be a short-term monetary loosening. These actions suggest that Mr. Rajan will move the RBI towards explicit inflation targeting (or CPI or WPI — he said that they were both important) using the repo rate as a policy lever. This contrasts with “stealth tightening” measures such as those that were introduced to support INR. Such an approach would be conventional; it seems surprising because it is a change in Indian policy, and because we have all become accustomed to liquidity-trap monetary policy in the West (one commentator noted that there had been no forward guidance — unsurprising, since that is a policy for extraordinary times).

A German poll (unusual this close to an election) has shown a small advantage for the CDU/FDP over the SPD/Greens, but the distance between them is within the margin of error. A grand coalition remains a real possibility if a) the FDP fails to get 5% or more of the vote, b) the (relatively) Eurosceptic AFD does get 5% or more of the vote or c) the SPD does better than the polls suggest. A grand coalition would likely take a softer line on austerity and fiscal transfers to the rest of the Eurozone. The most likely outcome remains a repeat of the CDU/FDP coalition.

Data:

UK public sector net borrowing for 2013/14 appears to be running above its fiscal-year-to-date level at this point in 2012/13, excluding temporary effects (transfer of Royal Mail pension plan and BoE asset purchase facility).

Existing home sales 5.48m, b.e. Aug, continuing the upward run.

Current account deficit stood at its narrowest since the same quarter in 2009. On the quarter, goods exports increased, while goods imports increased only marginally; services exports increased more than services imports; the surplus on income increased; and investment income increased.

The FOMC surprised the markets by maintaining its rate of asset purchases ($45bn of Treasuries and $40bn of MBS per month). Mr. Bernanke, at his press conference, seemed to do away with the previous guidance that asset purchases would likely finish by mid-2014 with unemployment at 7%, saying “there is not any magic number that we are shooting for”. The growth projections for 2013 and 2014 were revised down from June, but the forecasts for unemployment showed a faster rate of improvement. Mr. Bernanke inadvertently tightened monetary policy quite sharply (as shown in the large jump in real rates over the past few months) with his talk about tapering. The FOMC is now trying to undo some of the damage by maintaining QE.

The House looks set to approve a spending bill without funding for the healthcare law after Mr. Boehner failed to convince his caucus to do otherwise. The Senate looks set to pass a temporary spending bill that would not de-fund the healthcare law. The House could pass the Senate bill, if Mr. Boehner was prepared to contravene the Hastert Rule — but it is not in his interest to do so. Republicans are placing measures against Obamacare in both the spending and debt-ceiling bills, but I expect them to make a stand on the spending bill and allow the debt ceiling to be raised.

Writing in the FT, Charles Dumas has some clear thinking on Chinese capital-account liberalisation. He says the following. Chinese real interest rates have risen and China has become less internationally competitive. These effects are damaging the economy. The government could do another stimulus package, but that would damage the country’s competitiveness still further. A better solution would be to allow Chinese residents to invest abroad, which would be a step towards capital-account liberalisation and bring down CNY. But note that the Chinese government has a problem, in that a capital outflow would reduce bank deposits and expose some of the weaknesses of the banking system; large recapitalisations might be required. Chinese capital-account liberalisation, when it occurs, could be a huge phenomenon for global markets, as Chinese capital flows into global risk assets.

Housing starts 0.89m d.e. Aug. This series appears to have reached a plateau.

Building permits 0.92m d.e. this series also appears to have reached a plateau. Mr. Bernanke’s tapering talk seems to have brought the improvement in the housing data to an end. With mortgage refinancing also down sharply since the spring, one has to wonder whether residential investment growth could stall. Perhaps we could see a normal cycle, in which monetary tightening slows residential investment and then consumer spending more generally, with eventual knock-on effects on investment.

Larry Summers has withdrawn as a candidate to replace Ben Bernanke. Janet Yellen will now be the favourite.

The US and Russia have agreed a deal on Syria’s chemical weapons.

Barack Obama is making the debt ceiling a constitutional issue. He argued that it would be a fundamental change to the way the US is governed if one party was able to demand substantial changes in law by holding the credit of the US to ransom. I think that the Republicans have more to gain from digging in over the funding bill than the debt ceiling. Given Republican lawmakers’ entrenched positions, I expect a government shutdown. That is, unless Republican leaders can find a way of agreeing a temporary extension of current law while negotiations continue.

Data:

UK Rightmove House Price Index +4.5% YOY Sep.

Prelim. Michigan sentiment 76.8 d.e. A second monthly decline.

Retail sales 0.2% MOM d.e. Aug. +4.7% YOY.

Coming Up:

Draghi speech

Eurozone CPI

Eurozone currency account

Industrial production

China FDI

UK CPI

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https://johnbutters.org/2013/09/13/macro-stream-15/#respondFri, 13 Sep 2013 08:49:22 +0000http://johnbutters.org/?p=3362Continue reading →]]>It’s time to focus on the House budget negotiations. There are two things that need to be agreed: a government funding bill, by the end of September, and an increase in the debt ceiling, by some time in mid-October. Mr. Obama and Senate Democrats have indicated that they would accept a stopgap funding measures (at current levels) while negotiations continue.

Certain Republicans want to use either or both of these as leverage to defund Obamacare. Since they know that neither the Senate nor the President would likely agree to this, the conversation now seems to be about a delay to parts of the law, in particular the individual mandate. It is unlikely that the Democrats would agree this either, because the individual mandate is an integral part of the healthcare scheme (the only way to keep insurance costs down for the unhealthy is to bring a large number of healthy people into the market) and because any delay would risk giving the Republicans further opportunities to dismember the law.

Let us draw a distinction between Speaker Boehner and his party. The FT reports that Republican leaders are quite frustrated with their more conservative colleagues in the House. Let us take it that Mr. Boehner knows that a government shutdown or, worse, a failure to increase the debt ceiling would be bad for his party, but that he will not be able to take a majority of House Republicans with him if he decided not to threaten either, and might therefore lose his speakership.

First, let’s think about the idea of failing to raise the debt ceiling, on the insistence that Obamacare be defunded or partially postponed. Either of these outcomes would be a loss for the Democrats, so they would probably stick to their guns and allow the debt ceiling to be breached. In that case, the Republicans would suffer damage, but Mr. Boehner would likely keep his position in the short term. Hence, Mr. Boehner would suffer a less-than-total loss, and since this is probably a zero-sum game, Mr. Obama would enjoy a small relative gain. We can use that line of thinking to make some simple payoff diagrams, using 1 to represent a total victory and -1 to represent a total defeat.

Repub/Dem

Choice: Defund Postpone Fund

Defund +1/-1 +0.5/-0.5 -1/+1

Postpone NA +0.5/-0.5 -1/+1

Fund NA NA -1/+1

Boehner/Obama

Choice: Defund Postpone Fund

Defund +1/-1 +0.5/-0.5 -0.5/+0.5

Postpone NA +0.5/-0.5 -0.5/+0.5

Fund NA NA -1/+1

The first diagram shows that the Republicans, as the Calculated Risk blog puts it, are “bluffing into the nuts” — that is, they do not have a winning strategy. The second diagram shows that Mr. Boehner can minimise his losses from this affair by continuing to argue that Obamacare should be defunded or postponed.

The very negative outcomes for the Republican party in the “defund” and “postpone” cases are based on the assumptions that a failure to raise the debt ceiling would be a disaster, and that Republicans would get the blame. These seem plausible. But would a government shutdown be such a disaster, and would the damage to Republicans be as severe? A government shutdown does not imply a US default, after all. Indeed, since it could run on for months, during which the politics could change, the outcome is hard to predict. Let us make some payoff diagrams for this case:

Repub/Dem

Choice: Shutdown Fund

Shutdown NA ?

Fund NA -1/+1

Boehner/Obama

Choice: Shutdown Fund

Shutdown NA -0.5/+0.5

Fund NA -1/+1

Mr. Boehner’s best strategy is, again, intransigence. The difference here is that the Republican party also has a best strategy: shutting down the government. Since there is a possibility that the result of such an action would be something other than total defeat, it is a better strategy than any of those in the first set of diagrams above.

What can we forecast on the basis of this (quick) analysis? That the most likely outcome of the budget negotiations over the coming month or so is that Republicans will agree to raise the debt ceiling but refuse to agree the government funding bill without some modification of Obamacare, leading to a government shutdown.

Of course, there are other possibilities. The most obvious is that House Republicans will not act rationally, and will refuse to raise the debt ceiling. And it is possible, as was the case for the “fiscal cliff” at the end of 2012, that there will be a delay (to which, as noted above, Democrats are already open) that could change the calculus in some unforeseen way.

—

I note that the Italian government has not yet collapsed. I argued after Mr. Berlusconi’s conviction that such a collapse was unlikely as long as the PDL remained level with, or behind, the PD in the polls. That remains the case (http://bit.ly/13V7cjV).

It makes sense for Mr. Berlusconi to suggest that he could bring down the government: he wants some leverage to persuade the Senate not to eject him (which requires a vote) and to try to secure a presidential pardon. But, if neither of these things comes to pass, it would not be rational for the PDL to bring down the government.

—

The last time I recommended going short 10-year rates in the US was in the spring of 2011. The yield curve is steepening, and could soon get to the kind of levels we saw back then. Thus a trade could be coming into view. This chart shows the slope of the yield curve between 2Y and 10Y (blue) and between 3M and 10Y (red): http://research.stlouisfed.org/fred2/graph/?g=mmj.

—

Data:

Initial claims 292k b.e. and a large drop to a new weekly post-crisis low.

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https://johnbutters.org/2013/09/12/macro-stream-14/#respondThu, 12 Sep 2013 08:59:16 +0000http://johnbutters.org/?p=3359Continue reading →]]>I have just returned from holiday, and in big-picture terms the world is much as I left it. In the US, relatively tight fiscal policy and tightening monetary policy — an error on the part of the Fed — are likely to lead to a worse economic outcome than the equity market is currency discounting. In Europe, austerity remains entrenched and the recovery will be slow and grinding, although that will not necessarily prevent the equity market from going up. In the UK, forward guidance from the BoE has failed to shelter the country from the global rise in interest rates, partly because the BoE has opted for data-based forward guidance (in January, responding to the Fed’s move to data-based guidance, I argued that it would mean more interest-rate volatility than the time-based version, and so it has proved). The Chinese story continues to be dictated by every little tick of the PMIs. Japan is a point of light, although misunderstood: an article in the FT today argues that the BoJ has eased monetary policy, whereas in fact it was Mr. Abe and the whole political class that did so — real rates fell through 2012, and the currency began to move right after the election. Apparently Mr. Abe has still to decide what to do about the sales tax. If he lets the increase happen, that could choke off the country’s nascent economic recovery.

—

It’s seems US action on Syria has been put on hold because Mr. Putin has proposed a plan for the destruction of that country’s chemical weapons. The FT has a list of proposed conditions for Syria (from a French draft) here: http://on.ft.com/17REYb8. Mr. Kerry begins two days of talks with Mr. Lavrov today.

I have not focused on the latest Syria issue, because my mind has been elsewhere. But I cannot immediately see the case for missile strikes. What are they supposed to achieve? I suppose the idea is that they would be a slap on the wrist from the world’s policeman. Let’s use that as a model. If the slap is relatively weak, then the child will reoffend if it sees a relatively small gain from so doing. If the slap is strong, the child’s parents (Russia, China) will be affronted, and the gain from deterrence is not obviously larger than the loss from affront. If the slap is hard enough to hospitalise the child, the policeman will have to take responsibility for his care, as in Iraq and Afghanistan.

It would be desirable if parents and policeman were as one on the questions of child-rearing. But they are not. Given that, this Russian plan, and the American response, taken at face value, appear to be an example of the UN security council working as it should work in an ideal world: coming together to work out the best solution to a problem by consensus. Of course there is more than that going on beneath the surface, but even the fact that the players appear to be observing the forms of an ideal world is cause for optimism.

]]>https://johnbutters.org/2013/09/12/macro-stream-14/feed/0jdbuttersGetting back in the saddle…https://johnbutters.org/2013/09/11/getting-back-in-the-saddle/
https://johnbutters.org/2013/09/11/getting-back-in-the-saddle/#respondWed, 11 Sep 2013 11:43:01 +0000http://johnbutters.org/?p=3357Continue reading →]]>Had an excellent wedding and a fantastic honeymoon in Malta. And then went down with a stomach bug/food poisoning on Sunday night! Slowly getting back into the saddle.]]>https://johnbutters.org/2013/09/11/getting-back-in-the-saddle/feed/0jdbuttersGetting married on Saturday…https://johnbutters.org/2013/08/27/getting-married-on-friday/
https://johnbutters.org/2013/08/27/getting-married-on-friday/#respondTue, 27 Aug 2013 12:29:31 +0000http://johnbutters.org/?p=3354]]>… blogging is likely to be light!]]>https://johnbutters.org/2013/08/27/getting-married-on-friday/feed/0jdbuttersWhat is the State of Indonesia?https://johnbutters.org/2013/08/23/what-is-the-state-of-indonesia/
https://johnbutters.org/2013/08/23/what-is-the-state-of-indonesia/#commentsFri, 23 Aug 2013 14:18:23 +0000http://johnbutters.org/?p=3338Continue reading →]]>Indonesia is in the news because its currency has been falling. An article in the FT has even suggested a parallel with the 1990s Asian crisis, while others have suggested that the country’s lower external debt position today, compared to is position immediately before the Asian crisis, means that the situation is less threatening. Let us take a look at how the situation in Indonesia at present compares to that of the 1990s.

Total External Debt to GDP

Figure 1 shows Indonesia’s total external debt divided by its GDP. In 1996, before the crisis, this value stood at 53%. At the end of 2011, it was 25%.

Figure 1: Indonesia total external debt to GDP. Click to enlarge.

Figure 2 shows a breakdown of Indonesia’s external debt, as a proportion of GDP, between the public and private sectors. These series are only available from 2003. The chart shows that the total external debt ratio has grown a little since the end of 2011, to around 29% (the total of these series is not identical to that shown in figure 1, but it is reasonably close: see figure 3). So we can say that the country’s external debt position is considerably better than it was in 1996.

Figure 2: Indonesia public and private external debt to GDP. Click to enlarge.

Figure 3: Comparison of old and new external debt to GDP series.

Total Currency Reserves

Figure 4 shows Indonesia’s FX reserves as a percentage of GDP. At the end of 1996, the series stood at 7%. Today it is 11% (down a little from 2011, when the currency started to weaken: see figure 5).

Figure 4: Indonesia foreign-exchange reserves as a percentage of GDP. Click to enlarge.

Figure 5: IDR/USD (log scale). Click to enlarge.

Comments

Although Indonesia is in a better position than in 1996, right before the Asian crisis, its position is not so much better as to make one entirely sanguine about its prospects. External debt is high enough that a currency fall of the same magnitude as that of 1997 would leave it with a significant problem. And Menzie Chinn argues that “greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP)”. Indonesia’s, at 11%, are well below that threshold.

However, this does not mean that a repeat of the Asian crisis is likely. It is worth noting that Indonesia allowed its currency to fall in 2008, during the global financial crisis, rather than attempting to maintain a currency band at all costs (the latter being a policy that added to the magnitude of the currency’s decline when it was finally allowed to float in 1997). Perhaps, if capital outflows were to accelerate, it would do the same again.

I do not know the levels of external debt with which other countries have entered past crises, and what the results have been. That is an obvious area for further work.

ECB governor Nowotny says recent “stream of good news” means he “would not see many arguments now for a rate cut.”

Indian Finance Minister Palaniappan Chidambaram and Reserve Bank Governor Duvvuri Subbarao held a press conference. They said that India has no intention of imposing capital controls (i.e. further capital controls — they have already imposed them on domestic residents). They have two policy goals — growth and control of inflation — and effectively only one policy lever in central bank rates. The policy of increasing short-term rates while buying ten-year bonds to flatten the yield curve makes no sense, and is sending ambiguous signals to the market. That is why INR continues to fall.

Brazil has launched a $60bn currency intervention programme. There will be $500m a day of currency swap sales to support BRL between Mondays and Thursdays, and $1bn sold on the spot market on Fridays. The purpose of this is apparently to “reduce volatility”. But the government also talked about a stronger USD being good for Brazilian exports. That suggests that the purpose of this programme is merely to prevent a precipitous decline, in order to mitigate the short-term costs of a currency adjustment. It strikes me that it might be cheaper, and more effective, to make a strong commitment to a crawling currency floor for BRL.

Data:

Initial claims 336k d.e. and rose.

US flash PMI 53.9, d.e. and rose a little. New orders were strong at 56.5, increasing a little from the previous month. New export orders slowed slightly to 52 from 52.5.

China FDI increased 7.1% YTD/Y Jul. YTD/Y is a slightly strange basis on which to present figures. This was the strongest number since early 2012, although rather below the double-digit rates seen in 2010 and 2011.